Budgeting 101
For many, the word “budget” has a negative association as it can feel like a restriction on your life.
But when done right, a budget can actually help you minimize money-related stress, while giving you more control over your spending and saving habits.
In this article, we’re going to cover some of the basic terms associated with budgeting and share a simple way to create your own budget that will help you pay for your expenses while taking care of your own wants and needs.
But before we go too far, what exactly is a budget? A budget is a simple plan for every dollar and cent you make.
Within a budget, some of your money will go toward paying bills, some will go toward basic necessities like food, some will go into your savings, and some will be just for you.
But how do you know where your money should go?
The first step is to categorize your money into 3 groups: Needs, Wants, and Savings.
For example, a typical “Needs” category would include things like:
- Rent
- Utilities
- Groceries
- Child care
- Insurance
Your “Wants” category, on the other hand, will include the “nice-to-haves” such as:
- Dining out
- Entertainment
- Personal shopping
- Travel
Finally, your “Savings” category would include short and long-term savings goals like:
- Paying off debt
- Emergency Fund savings
- Mortgage payments
- Retirement savings
- College fund for a child
Keep in mind, these are just examples. You’ll need to look at your own spending habits to come up with the items that apply to you and your life.
Once you make a list for each of the 3 categories, it’s time to figure out how much money to allocate to each group.
The 50/30/20 Rule
If you’re new to budgeting, we recommend trying out the 50/30/20 rule which allocates 50% of your money to “Needs,” no more than 30% for “Wants,” and at least 20% for the “Savings” category.
For example, if you make $2000/month, $1000 would go into the “Needs” category, $600 would go into the “Wants” category, and $400 would go into your “Savings” category.
Following the 50/30/20 rule will help you avoid deficits (spending more than you earn) so you can eventually get to a place where you experience regular surpluses (having extra money left over after your expenses have been paid).